CONCORD, N.H. — Last year, Republican lawmakers shifted more of New Hampshire’s public pension costs onto workers to ease employers’ expenses. Now, they’re proposing a parallel plan for new employees that lacks a guaranteed lifetime benefit.
State Sen. Fenton Groen, a Rochester Republican, is sponsoring legislation to create a mandatory defined contribution plan for public employees hired starting Nov. 1. Such plans are relatively rare in state governments, though more states are looking at them as a way to shift the financial risks of traditional defined benefit plans from employers to employees.
Under Groen’s proposal, employees and their employers would have to contribute to a system similar to a 401(k) where their money is invested and their retirement payment depends on their total investments when they retire.
Groen is confident workers will be able to retire with a comparable retirement. Their retirement payment will depend on the amount of risk the worker is willing to accept in his investments, he said.
“If he chooses to accept a higher level of risk, then the average return is likely to be higher,” he said.
The existing system, which provides employees with a guaranteed retirement payment based largely on the employee’s years of service and final salary, would not change, though labor unions representing workers worry the shift to a new system will weaken the old system over time.
The existing system covers more than 50,000 active and nearly 26,000 retired state and municipal workers, teachers, police and firefighters. It is funded by contributions from employees and employers and by the return on the $5.9 billion fund’s investments.
Labor unions believe as more workers are required to enter the new system and workers in the old system retire, too few active workers and their employers will be paying into the old system to support it. They argue a recession like the one experienced in 2008 would hurt the pension fund’s investments, putting pressure on employers to boost contributions or close the system.
“We’re not howling at the moon. Clearly the thought is the old system will collapse,” said Rick Trombly, director of policy and advocacy for the National Education Association of New Hampshire.
Labor groups are fighting Groen’s proposal as too risky. They argue workers won’t know what they can count on for a pension.
“Now it will be: A, they assume all the risk; and B, it will be an unknown number; and C, the risk that it will not be enough for them to live on,” said Trombly.
Labor groups point to a study by the New Hampshire Retirement System’s consultants that concluded transitioning to a defined contribution system will be more expensive for employees and employers than maintaining the current system. The study said that closing the old defined benefit system to new members would change its demographic makeup and require changing to a more conservative investment strategy. That would mean less investment income and require higher employer contributions.
The existing public pension system is only 57 percent funded. The study estimates the unfunded liability would increase from $4.3 billion to $5.5 billion if the system is closed to new members and a parallel defined contribution system implemented.
Colin Manning, spokesman for Gov. John Lynch, said that given “the estimates of a significant increase in costs, the governor has some very real concerns about the legislation.”
Over the past few years, the Legislature has taken a series of steps to fully fund the system. A portion of employers’ rates go toward funding the unfunded liability gap with a goal of closing it in 26 years. The study said if lawmakers close the existing system to new workers and increase the unfunded liability, employer rates would increase. The gap was created both by employers not pa ying enough into the system and union-backed withdrawals from the fund to improve pension benefits.
“A key difference between (defined benefit) and (defined contribution) is that the investment risk is borne by the employers in a (defined benefit) plan and by the participants in a (defined contribution) plan,” the study said.
New Hampshire AFL-CIO President Mark MacKenzie said he worries that the employees will find themselves facing what millions of other Americans faced when the stock market crashed four years ago. He also questions if enough regulations are in place to protect employees’ money.
Under Groen’s bill, workers would pay the same amount into both plans. For example, a teacher would pay 7 percent into whichever plan he or she was enrolled in. The employer would pay into each plan as well. Employers also would contribute to the old plan for workers in the defined contribution plan to help close the old system’s unfunded liability gap.
Workers would be gradually vested in the new plan over eight years, at which time they would be fully vested.
“After the eighth year, all the money belongs to them and can be taken to another employer,” said Groen.
Labor groups who fought last year and failed to block changes to the existing system that increased their contribution rates to ease the costs to employers say they’re wary of Groen’s proposal. Last year’s changes also required newly hired workers to work longer for reduced benefits.
“I think the intent is to set up the defined benefit plan for failure under the guise that the defined contribution plan is better for new workers. I don’t think their intent is to do right by workers,” said Diana Lacey, president of the State Employees’ Association which represents most of the state’s roughly 10,500 workers.
Groen disagrees and argues a defined contribution plan ultimately is better for workers because they gain more control over their money. If workers leave public employment, they can take the money with them, he said.
“The money will go out to the employee and not be subject to the whims of politicians seeking to have lower employer rates or unions seeking higher benefits,” he said.